Andrew Needham provides some practical advice for businesses facing an HM Revenue & Customs VAT inspection, for Tax Insider Magazine.

Why am I Getting a Visit?

In most cases businesses are selected for a VAT inspection by a computerised selection process based on criteria including the business' turnover, its trade class and past compliance history.

Most small to medium sized businesses only get a visit once every 5-10 years and some never get a visit at all!

Tip

You can reduce the chances of a VAT visit by sending in your VAT returns and payments on time. Also if you have an abnormal return, perhaps a large repayment instead of a payment, write to HMRC and let them know why, for example the purchase of capital equipment or a large bad debt relief claim as this can forestall a visit.

What will the VATman Look For?

Tip

When the Inspector arrives be pleasant and offer him a cup of tea – always best to get off to a good start! He will start off by asking some questions, confirming the name, address and VAT number, your accountant etc. 

You will be asked about your business activities. If you are involved in certain business activities the Inspector will consider you more of a risk and he will look at these areas. For example, if you are involved in any VAT exempt activities or land and property he will look at these areas.

You will also be asked if you receive regular VAT repayments, and he will want to know why.  If you make mainly zero-rated supplies (books, new house building, children’s clothes, food etc.) he will normally be satisfied and not look into it in too much depth. If your answer is that you are involved in exports or sales to EU customers he will want to check that you have all the right paperwork so get this ready in advance.

You will then be asked about more detailed areas of your business. Retail schemes, Cash Accounting, "Option To Tax" and Partial Exemption arrangements will be among the questions.  If you are partly exempt (make both VATable and exempt supplies) he will look at these areas.  If you have opted to charge VAT on property transactions he will check that you have charged VAT correctly and if some properties are not opted he will check that you have not claimed VAT back on them. 

HMRC will also want to know if you have introduced any cash into the business or if you have had any thefts of stock. If you have, document it properly. You will also be asked if you have claimed any VAT bad debt relief and he will check that you have not claimed it back too soon.

You will also be asked the VAT Inspector’s favourite questions, "Do you claim back the VAT on car fuel and have you paid the scale charge?"  Make sure you have, as it is one of the most common reasons for an assessment. [ See also Andrew's earlier article - Claiming Back VAT on Motoring Expenses for further guidance on this common problem area - Ed. ]

They will also request a copy of your last annual accounts. Make sure the sales figures agree with the VAT returns. If they don’t he will investigate this further so make sure you know why – for example that you are on cash accounting.

Normally the VATman will check the figures for the last VAT return period and will concentrate on any large or unusual transactions so have this paperwork ready.

Practical Tip

Check these points in advance and if you find any errors make a voluntary disclosure at the start of the visit using the form VAT 652 and you can avoid a penalty.

Article Added Sunday, 16 October 2011 | 656 Hits

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